AMTAX Holdings 227, LLC v. CohnReznick LLP

Background

AMTAX Holdings 227, LLC held a 99.99% interest in a limited partnership that owned a 185-unit affordable-housing property in Boston, Massachusetts, through the federal Low-Income Housing Tax Credit program. CohnReznick LLP had served as the partnership’s auditor and tax preparer for approximately twenty years.

The partnership had granted Tenants’ Development Corporation, a nonprofit organization, a right of first refusal to purchase the property. In 2020, CohnReznick calculated the purchase price at $17,108,380 and included no taxes attributable to the sale. The nonprofit later sought to exercise the right of first refusal. The sale had not been completed when this case was decided.

AMTAX alleged that CohnReznick had secretly agreed with the partnership’s general partner to calculate a price that excluded exit taxes. It asserted claims for breach of fiduciary duty, professional negligence, fraud, and unjust enrichment. CohnReznick moved to dismiss under Federal Rule of Civil Procedure 12(b)(1) for lack of subject-matter jurisdiction and Rule 12(b)(6) for failure to state a claim. The nonprofit also moved to intervene and dismiss.

Jurisdictional issue

AMTAX relied on federal-question jurisdiction under 28 U.S.C. § 1331. Because its claims arose under state law, AMTAX had to satisfy the narrow test for state-law claims that present a federal issue. Under that test, the federal issue must be necessarily raised, actually disputed, substantial to the federal system as a whole, and capable of resolution in federal court without disrupting the division of responsibilities between federal and state courts.

AMTAX argued that the case required interpretation of Section 42(i)(7) of the Internal Revenue Code and related federal tax provisions. CohnReznick argued that the claims concerned whether it owed duties to AMTAX and whether it properly interpreted the parties’ right-of-first-refusal agreement.

Court’s analysis

The court held that AMTAX had not shown that its claims necessarily raised a federal question. Documents attached to the complaint indicated that CohnReznick calculated the purchase price using the language of the right-of-first-refusal agreement, without referring to Section 42(i)(7). The court therefore found AMTAX’s argument that the claims depended on interpreting federal tax law too tenuous to establish federal jurisdiction.

The court also addressed the remaining jurisdictional requirements. Although the parties disputed the meaning of Section 42(i)(7) and whether CohnReznick acted consistently with that provision, the court concluded that any federal issue was not substantial to the federal system as a whole. The dispute was fact-specific and centered on a private agreement whose terms could vary from agreement to agreement. AMTAX had not shown that resolving the dispute would affect a large number of other low-income housing tax-credit transactions.

Finally, the court concluded that exercising federal jurisdiction would disrupt the federal-state balance. Professional-malpractice claims traditionally fall within state regulation, and allowing federal courts to hear state-law claims involving accountants’ interpretation of the federal tax code could shift many such cases into federal court. The court also noted that Congress had delegated oversight of low-income housing tax-credit compliance to state agencies.

Disposition

Judge Naomi Reice Buchwald granted CohnReznick’s motion to dismiss for lack of subject-matter jurisdiction without prejudice and directed the Clerk to dismiss the action. Because the court lacked jurisdiction, it did not reach CohnReznick’s Rule 12(b)(6) motion for failure to state a claim. The court also did not reach the nonprofit’s motion to intervene and dismiss.